Welcome to the Liquidity Services, Inc. Second Quarter of Fiscal Year 2025 Financial Results Conference Call. My name is Michelle, and I will be your operator for today's call. Please note that this call is being recorded. At this time, all participants are in a listen-only mode. I will now turn the call over to Michael Patrick, Liquidity Services' Vice President and Controller.

Good morning. On the call today are Bill Angrick, our Chairman and Chief Executive Officer, and Jorge Celaya, our Executive Vice President and Chief Financial Officer. They will be available for questions after their prepared remarks. The following discussion and responses to your questions reflect management's views as of today, May 8, 2025, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and in filings with the SEC, including our most recent annual report on Form 10-K. As you listen to today's call, please have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. During this call, management will discuss certain non-GAAP financial measures. In our press release and filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP measures, including the reconciliations of these measures with their most comparable GAAP measures as available. Management also uses certain supplemental operating data as a measure of certain components of operating performance, which we also believe is useful for management and investors. This supplemental operating data includes gross merchandise volume and should not be considered a substitute for or superior to GAAP results. At this time, I will turn the presentation over to our Chairman and CEO, Bill Angrick.

Good morning, and welcome to our Q2 earnings call. I will review our Q2 performance and the progress of our business segments. Next, Jorge Celaya will provide more details on the quarter. Our team made significant progress towards our strategic financial and operational goals this past quarter, notwithstanding emerging economic uncertainty. We expanded our market presence and service offerings and are moving closer to our midterm goal of $2 billion of annual GMV with our current GMV annualized run rate of $1.67 billion. We are growing our volumes, buyer base, and recovery rate in key high-value categories such as construction, equipment, trucks, vehicles, and consumer return goods. During Q2, we set new records in the number of sellers, assets listed, and bidder participation in these categories. We also continue to drive adoption of our asset-light services in all segments and are transacting approximately 80% or more of our total GMV under the consignment pricing model. Despite significant investment in our business expansion and product roadmap initiatives, we are also meeting our goal of a 20% EBITDA margin as a percentage of direct profit or net revenue. We generated over $21 million of operating cash flow during Q2 and have a debt-free balance sheet with $149 million of cash to execute both our organic and M&A growth strategies. Now let's take a closer look at each segment. Our GovDeals segment continues to successfully serve customers in both government and government-adjacent markets in the sale of used equipment, vehicles, and other commercial assets. Through this growth process, we have expanded our GovDeals target addressable market to an estimated $5.4 billion. During Q2, GovDeals attracted new higher volume clients who previously relied on full-service auctioneers by implementing our innovative hybrid solutions that leverage our scalable online marketplaces. Recent examples of these wins include New York City, Buffalo, New York, Boston, Sacramento, California, Fairfax County, Virginia, and Amarillo, Texas. GovDeals has also driven consistent account acquisition and expansion of existing accounts, which has resulted in 12% organic growth in the number of assets listed in the first half of fiscal year 2025 on our GovDeals platform. Vehicle volumes have also grown steadily year over year, noting, however, that given the current tariff policies, it's likely that vehicle supply chains will undergo some disruption in the future, and used vehicle prices are likely to rise at some point during this period. Our CAG segment posted solid results during Q2 with double-digit organic growth in GMV. The breadth of our CAG marketplace was on display during Q2 as we completed transactions in the US, the UK, India, Poland, Sweden, and China across a variety of verticals, including energy, biopharma, consumer packaged goods, and industrial machinery. Our growing CAG heavy equipment category continued its rapid growth, setting records for the number of unique sellers, repeat sellers, GMV, and completed transactions during Q2. Buyers continue to be attracted to the savings, immediacy, and convenience offered in our used equipment marketplaces. During Q2, we enjoyed record buyer participation in our CAG segment as the number of auction participants grew by 9570% year over year in our heavy equipment and CAG industrial verticals during Q2. Our RSCG segment expanded its relationships with sellers across categories and geographies to drive 29% year-over-year growth in GMV during Q2. Margins were roughly flat year over year due to a weakening consumer, higher inbound purchase rates, and logistics costs. Our market share gains have been fueled by the high quality and reliability of our solution, which ensures that our retail clients benefit financially and operationally from our services. In fact, we are now offering our sell-in-place software solution to some of the largest e-commerce players outside of the US to manage and sell their returned goods on our platform, demonstrating how our investment in easy-to-use listing tools and multilingual capabilities is paying off. Our observation is that the current economic climate is putting pressure on many players in the retail liquidation industry, which has historically led to greater levels of insolvency or bankruptcy of service providers, creating adverse operational and financial impacts on retailers. Also, it is unclear whether cash-strapped consumers are prepared to absorb higher costs of goods due to new tariff policies. Against this backdrop, Liquidity Services offers the retail industry a safe harbor for our clients and buyers by providing consistent, reliable, secure, and scalable performance. In particular, our multichannel buyer base and value-added logistics services have been critical in assisting our retail clients in navigating this uncertain economic environment. Finally, our Machinio and our newly launched software solutions business each continued to add customer value by enhancing our service offerings and expanding our market reach. Machinio is strengthening its value proposition by integrating e-commerce, payment, shipping services, and new email marketing campaign tools to enable used equipment sellers to manage their sales more efficiently. We continue to invest in platform improvements and have increased our capacity to innovate through our software solutions business, which includes our acquired auction software business and software development team. Collectively, our product teams are hard at work introducing new features in the front end and back end of our marketplace platform, including AI-assisted asset description tools, asset alerts, white-label client landing pages, text notifications during the bid process, and mobile-responsive asset upload templates. As we've noticed, clients across all industries are grappling with the effects of emerging tariffs on their supply chains, which could impact the timing and volume of asset sales, including retail goods and used vehicles. However, our market-leading solutions help our seller clients and buyers respond to economic uncertainty and evolving supply chains by offering flexible and liquid marketplaces for transacting any type of equipment or asset in all regions of the globe. With our strong financial foundation and strategic focus, we are well positioned to seize emerging opportunities to drive long-term growth, even in uncertain times. I'll now turn it over to Jorge for more details on the quarter.

Good morning, and thank you, Bill. During the second quarter of fiscal year 2025, we grew our consolidated GMV 15% to $367.4 million as each of our segments advanced their goals to generate growth through expanding service offerings and market share. Our ongoing efforts to create operating expense leverage were again realized during this quarter, resulting in improvement across our key profitability metrics. Our fiscal second-quarter performance was consistent with our guidance range despite encountering some weather-related delays earlier in the quarter. Comparing our results for the second quarter of fiscal year 2025 to the same quarter last year, our revenue grew 27% to $116.4 million, consistent with the guidance we provided with our revenue to GMV ratio. Consistent with the first quarter of fiscal year 2025, revenue has continued to grow faster than GMV, mainly due to our market share gains resulting in the expansion of lower-touch purchase programs in our retail segment. Our GAAP earnings per share increased 22% to $0.22 and 15% to $0.31 on a non-GAAP adjusted basis. Our non-GAAP adjusted EBITDA was $12.2 million, slightly above last year. In addition to the early quarter weather-related delays that affected GovDeals, our retail segment experienced some delays in buyer demand, and last year, our fiscal second quarter benefited from catching up on retail and CAG GMV delayed from the first quarter of fiscal year 2024. We ended the fiscal second quarter of 2025 with $149 million in cash, cash equivalents, and short-term investments. We generated $21.6 million of cash from operations during the quarter and used $6.3 million to acquire auction software. We continue to have zero debt, and following an amendment entered into this week, improving our line of credit capacity and terms, we currently have $26 million of available borrowing capacity under our credit facility. We continue to expect our near-term capital expenditures to not significantly vary relative to our recent historical averages. Specifically comparing segment results from this fiscal second quarter of 2025 to the same quarter last year, our retail segment was up 29% on GMV and up 46% on revenue, driven by increased volumes from our client purchase model programs relative to our consignment growth. Segment direct profit was slightly down by 3%. Our capital assets group segment was up 14% on GMV, led especially by continued market share increases with recurring sellers of low-touch heavy equipment. Revenue was down 22%, and segment direct profit was down 6% as increases in heavy equipment consignment GMV were offset by last year's comparable fiscal second quarter of 2024 that included large international spot purchase transactions that had been delayed from the first fiscal quarter of 2024. Our GovDeals segment's GMV was up 9%, revenue up 5%, and segment direct profit up 3%. These results reflect impacts from weather-related delays during the quarter and reflect growth in our lower take rate real estate category. Our Machinio and software solutions businesses in total increased revenue by 22%, resulting in segment direct profit being up 19% on a combined basis, driven by Machinio's continued solid performance and the acquisition of Auction Software. Our outlook for the third quarter of fiscal year 2025 reflects solid year-over-year growth at the midpoint of our range. While we currently have a positive outlook for this upcoming quarter, our low end of guidance reflects the potential for more volatility given the uncertainties in the macroeconomic environment. We do not currently anticipate significant near-term disruptions from the global economic uncertainties, with mainly our CAG segment experiencing some delayed cross-border transactions as we entered this fiscal third quarter. We still anticipate the CAG segment to grow the top line year over year, led by our heavy equipment and industrial categories. While vehicle volumes were tempered this past fiscal second quarter and can experience delays during uncertain economic cycles, we began the fiscal third quarter with solid volumes year over year in our GovDeals segment. In our guidance, our fiscal third quarter for GovDeals reflects its traditional seasonal peak in GMV. The expanded purchase programs in our RSTG segment are expected to increase retail GMV and revenue year over year and sequentially, with revenue growing at a higher rate than GMV and with a higher overall mix of lower-touch product flows, improving the overall results. Machinio and our newly acquired software solutions business are expected to see growth in revenues year over year. On a consolidated basis, consignment GMV is expected to continue to be in the low eighties as a percentage of total GMV. As our GovDeals segment enters its seasonally high quarter, consolidated revenue as a percent of GMV is expected to be approximately 30%. And the total of our segment direct profit as a percent of consolidated revenue is expected to again be in the low to mid-40 percentage range. These ratios can vary based on our overall business mix, including asset categories, in any given period. Consistent with prior year trends, we anticipate sequential growth in our top-line results for the second half of our fiscal year compared to the first half. This growth and related operating leverage have historically driven sequential improvement in our key profit metrics and ratios when comparing the second fiscal year half to the first half of a fiscal year. Management guidance for the third quarter of fiscal year 2025 is as follows. We expect GMV to range from $395 million to $430 million. GAAP net income is expected to range in the range of $6 million to $9 million, with corresponding GAAP diluted earnings per share ranging from $0.18 to $0.28 per share. Non-GAAP adjusted diluted earnings per share is estimated in the range of $0.27 to $0.36 per share. We estimate non-GAAP adjusted EBITDA to range from $14.5 million to $17.5 million. The GAAP and non-GAAP EPS guidance assumes we have approximately 32.5 million to 33 million fully diluted weighted average shares outstanding for the third quarter of fiscal year 2025. Thank you, and we will now take your questions.

Thank you. We will now begin the question and answer session. If you wish to be removed from the queue, please press 11 again. If you are using a speakerphone, you may need to pick up the handset first before pressing the keys. Our first question comes from Gary Prestopino with Barrington. Your line is open.

Good morning, Bill and Jorge. How are you guys doing?

Very well, thank you.

Good. A couple of questions. In the segments where you cited weather, particularly GovDeals, was that impact there related to more of the vehicle turnover versus what you are doing in real estate? And did it really just stem from cold weather or whatever? I am just trying to get a handle on what happened in the quarter related to weather for you guys.

Sure. The storms that came through, particularly in the Southeast, included a variety of tornadoes and extreme weather events that affected a lot of the rolling stock listing process occurring at these various locations. So people are sheltering, closing offices, and therefore access to the physical assets is interrupted. That is primarily what we are referring to.

Okay. That is fine. And then I want to just talk about briefly what happened in the quarter. It looks like on $78 million or so purchase revenue, you generated about $8.9 million of gross profit. Last year, you did $53 million of revenue and $8.9 million of gross profit. So bottom line is you had a significant step down in the gross profit on the purchase transaction. And I think that kind of skewed the quarterly results in terms of the adjusted EBITDA. So, was that something where you are working with third parties and they got a percentage of the profitability on a sale, or could you elaborate on that?

Sure. I will give a couple of comments, and Jorge can add his. There is a mix there both between industrial CAG principal deals and then retail supply chain purchase model programs. We have used a variety of third parties to refer business to us, and in some cases, sales can occur with a revenue share that would reduce the margin realized on the sales. Additionally, we had a number of inbound logistics costs set up costs for some new purchase model programs in retail, which reduced profitability on that, along with some multiyear agreed step-up in rates for certain product categories that also compressed margins. I think there was a little ripple of consumer demand being tempered as people were holding on to cash trying to understand exactly to what extent the economy would change relative to some of these new policies at the federal level.

Yes, Gary, just to add to that a bit. So we also have to remember that in the second quarter of last year, we had all the catch-up from the first quarter of CAG and retail. So when we are comparing this second quarter to the last second quarter last year, we had some unusual benefits last year in the second quarter. But also, to add to what Bill said, the mix of product or the contracts we are getting, when we refer, for example, in retail to a shift to lower-touch purchase products, that usually means that lower touch, we have a lower operating expense. So despite the potential of having on those individual contracts, even when blended take rates or direct profits may look like they are down, they can be offset by the operating expenses that we do not necessarily need to have to support these lower touch programs. So if you look at our operating tech and line, you are going to see a sequential drop in expense. When we comment on operating leverage, these are the kinds of things that we mean. It is not necessarily a direct correlation between the direct profit and EBITDA, for example, because it will depend on your mix. You may not need all the operational costs. And as Bill said, we also had some delays on selling through in retail. So we are holding inventory, and we have transportation costs. These are things that should be sold in the next month or quarter, and then you are not going to have those transportation costs. You have already taken them in the prior quarter. So things like that, all of the above is what slightly changes these numbers. Not everything is perfect and timed perfectly in business.

Okay. Thank you. That is helpful.

Thank you. Our next question comes from George Sutton with Craig Hallum. Your line is open.

Bill, I wondered if we could just walk through a world where tariffs increase the cost for new items. And you obviously are a predominantly used marketplace. Generically, should not that be to your favor?

Yes. We know from a few business cycles over the last twenty years that there is a preference to trade down to the used equipment market when either there is a price gouging effect on new equipment or new equipment is simply not available. We have seen this in the construction vertical, the used equipment vertical, and a variety of other industrial categories. On balance, used equipment is a safe harbor for buyers and certainly stimulates activity in the marketplace. We saw record activity in our heavy equipment marketplace, in our industrial vertical, and in the used vehicle GovDeals vertical. You have been targeting more federal agencies and federal government opportunities. How do you feel positioned for those opportunities? I think we have the perfect complement of solutions. The reality is, this is a slow-moving, very complex interagency process. We are a known quantity, and I think we will have an opportunity, the timing of which we cannot precisely predict. But we have done pilots successfully for federal agencies, and we stand ready to serve.

You mentioned it, with your auction software business, you have created some new features both in the front and the back end. Can you give us some more specificity as to what kinds of things you are creating there and what types of opportunities that creates?

Sure. Everything we sell has to be described and photographed and listed. There is tremendous potential with AI computer vision tools to use image recognition and supplement that with automated rich listings that will be very easy to feed to search engines and our own internal marketplace categories. This automation process has great mid and long-term potential to reduce listing costs and labor costs. On the buyer side, the ability to more precisely match what buyers have demonstrated interest in through browsing and bidding history is another area of improvement. We believe we can increase the conversion rate on the platform, which will ultimately improve GMV, revenue, and direct profit. We have activities on the uploading of assets through mobile devices. This process reduces the number of steps and makes it easier to use a handheld device to capture and upload images in fewer steps. We have also been giving sellers more personalized landing pages inside our marketplace to append data that buyers might find interesting. For instance, if a seller is New York City, they have a bit more brand identity inside our GovDeals marketplace. We are testing features that provide buyers greater visibility to a particular seller, their history, shipping speed, and asset types sold. We are also using our software engineering team to expand third-party selling tools on our platform. We have a large international e-commerce player now listing and selling returned goods on our retail platform. The ability to make it easy for them to access our tools through API and integrate listing across different languages is beneficial. These are just a variety of initiatives. In many cases, the auction software transaction was an acquisition of talent and engineering capacity as well as capturing a book of business of mid-sized and small businesses selling online, which is an area of opportunity.

Alright. Perfect. That is it for me. Thank you.

Thank you. We have no further questions at this time. This does conclude the question and answer session. You may now disconnect. Everyone, have a great day.